A stealth default where the public deficit is made insignificant due to inflation has been and most likely still is the goal of central banks today. 

It is a stealth default since investors holding the government bond get their money back on maturity, receiving yields.

But the capital invested has become so inflated away that it is as if they got part of their money.

Ten thousand dollars in 2024 will buy you a fancy electric bike and a bag of groceries.

In the early 90s, the same amount could be exchanged for a new entry-level Ford with spare change to pay monthly food bills. 

Inflation crushes savers, cash depositors and bondholders, but it hugely benefits debtors, making servicing the debts manageable. 

The central bank’s main product is debt, with its prized cash cow being the government. US Interest To Hit $1.6 Trillion By Year-End, Making It The Largest US Government Outlay.

Stealth default
Moving Inflation Goal Post

“Ten thousand dollars in 2024 will buy you a fancy electric bike and a bag of groceries”

WEALTH TRAINING COMPANY

Central banks navigate policy to stealth default, avoiding a spotlight default

No business wants to bankrupt its golden customer, and it is that logic that explains why central banks will hide the inflation figure with creative accounting, suppressing yields by buying bonds and keeping interest rates low. 

If the Fed raised interest rates to 20% as they did in the 80s to combat inflation, it would no longer be a stealth default. 

A 20% Fed fund rate in 2024 could trigger the worst sovereign bond market crash in financial history. 

The 2023 worst bond market crash ever resulted in trillions of dollars of bonds illiquid and bankrupted five banks, forcing the Fed hand to pivot. 

Stealth default, imbalance in the bond market 

When a fresh batch of bonds is issued, at a new higher yield, of say 3 to 4% to finance a ballooning “unsustainable,” Fed Chair Powell’s words, public deficit, the buyer of last resort, the Fed steps in, keyboard new currency into existence and purchases bonds, which is quantitative easing QE. 

So, investors who bought the bonds at 2% are holding an illiquid asset.  

Central Bank-Induced Crash

“The 2023 worst bond market crash ever resulted in trillions of dollars of bonds illiquid and bankrupted five banks, forcing the Fed hand to pivot”

WEALTH TRAINING COMPANY

Who wants to purchase bonds with a 2% yield when you can buy a newly issued bond paying 4% today? 

Moreover, because treasury bonds were perceived to be a safe haven asset, bought by conservative investors, banks and pension funds, the Fed was forced to do stealth QE, in the form of emergency bank funding, to buy the toxic asset that no investor wants.     

But increasing the M2 money supply to do QE and suppressing bond yields, so that the government can make its one trillion dollar interest payments on the debt is inflationary. 

“Nobody wants to hold the local currency peso, and people are saving in assets, which are inflation-protected”
Wealth Training Company

Stealth default, ballooning public debts, M2 and economic recessions  

Professor Reinhart and Rogoff conducted their studies on the history of financial crises and their aftermaths, which included their 2011 book “This Time Is Different: Eight Centuries of Financial Folly.” Their most influential claim was that rising government debt levels are associated with much weaker economic growth, indeed negative ones.  

“GDP growth is low in the year after the debt-to-GDP ratio exceeds 90 per cent.” 

Rogoff findings, based on empirical data, that when nations exceed 130% of debt to GDP, there is always a default. 

A default could look like a stealth default, a massive currency depreciation. It could be excessive financial repression, or it could be some default in the government bond market.      

It’s a USD stealth default when the price of an ounce of gold rises in lockstep with bond yields

Argentinian bonds pay over 50%, but investors are not falling over each other to buy the bond because the inflation rate in Argentina is over 100%. Nobody wants to hold the local currency peso, and people are saving in assets, which are inflation-protected. For the older generation, it is precious metals. The digital generation with digital skills perceives cryptocurrencies as a lifeline to operating in a digital world and storing wealth. 

But it is established old wealth, pushing gold prices higher despite treasury bonds paying nearly 5%.

Why?

“Bond yields keep going higher, and the market value keeps falling” – Wealth Training Company

Investors are worried about a stealth default currency debasement due to the continuous amount of currency the Fed needs to print to buy by the oversupply of treasuries and suppress yields

As explained above, holding treasury bonds over the last few years has been a depressing investment because of inflation. 

Bond yields keep going higher, and the market value keeps falling.  

So treasuries, the pillar of Western finance pledged by commercial banks as collateral to raise loans, have not been a store of wealth.  

In other words, prime western collateral is cracking under the weight of inflation. If the main pillars of a structure are fractured and unable to support the weight of its structure, then the likelihood of catastrophic sudden collapse is high. The structure is deemed to be too dangerous to occupy. 

When a paper Empire of Debt comes crashing down like a house of cards, it is no longer a stealth default but a real one, with the endgame being currency collapse hyperinflation.  

Stealth default and WW3          

The secret shareholders of the most prominent Western banking cartel, the Fed, probably fear undisguisable inflation more than WW3. 

As currency debasement inflation worsens, the economy deteriorates, and the multi-front wars in Europe, Middle East and Africa worsen.

The worst war in Europe since WW2 was triggered by the encroachment of NATO on a superpower buffer zone, Ukraine. 

Fears of a decapitation nuclear strike, an existential threat to Russia, resulted in Russia invading Ukraine. 

Two years on, Ukraine is a country in ruins, a generation of young men wiped out, and there is now talk of sending F16s, a flying platform capable of carrying and delivering nukes in a potential decapitation strike on Russia. F16s will be blown out of the sky if they enter Ukraine’s airspace, warns Russia. NATO has publicly declared WW3 if its F16s are attacked by Russia. WW3, being declared, could be weeks away. 

As these dead-end policies continue, capital flows into private assets could accelerate along with the melt up. 

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